Apple’s Ecosystem Lock-in Has Been Made Weaker By WeChat

By Long S. Le and Shawn Vecellio

INTRODUCTORY REMARKS:

Case-based learning places students at the heart of real-life decision situations, wherein they grapple with uncertainty and move from particular case problems to general underlying principles such that decision criteria and viable solutions can be identified and developed.

In exploring a case-based pedagogy that could better frame the teaching and learning of international business, the Global Citizen utilizes Howard Gardner’s Five Minds for the Future – the synthesizing, disciplined, creating, respectful, and ethical minds. In brief, these five minds are prescribed as cognitive capabilities for students to effectively navigate and positively impact a world that is increasingly disrupted by digital devices and systems, overwhelmed by information, and disconnected by national differences. The five minds are employed as lenses for students to engage in the content taught as well as to cultivate deeper insights through linkages across disciplinary courses and between formal education and workplace contexts. Before starting, students are asked to become familiar with this introduction to the five minds by Howard Gardner.

INSTRUCTIONS:

Read the case scenario of “Apple’s ecosystem lock-in has made weaker by WeChat” (and watch “How China is Changing Your Internet” by The New York Times for further background). In analyzing the scenario, identify the root causes that are challenging the growth of Apple’s iPhones in China, connecting the critical causes to possible criteria for decision-making. Additionally, considering yourself part of the Apple leadership in China, recommend decisions based on your stated criteria through which specific actions should be taken toward mitigating the key challenges.

For those interested in doing the decision scenario utilizing Gardner’s Five Minds for the Future, apply the following instruction.

In analyzing the scenario, synthesize and articulate the inferences of international trade theories – mercantilism, comparative advantage, product life cycles, international strategic trade, and/or the national competitive advantage of industries – that impact the growth of Apple in China, specifically in a manner that would provide enough disciplinary knowledge for informed decision-making. Additionally, considering yourself part of the Apple leadership in China, how would you creatively, respectfully, and ethically account for international trade theories that could improve or re-strategize the business situation.

SUGGESTION:

The challenges of placing students in complex real-life decision scenarios include making a space for structured and protracted discussions. For students who are looking for the right answer(s) for Apple in China, it should be emphasized that international business is not (yet) a science. Rather, management and problem-solving in international business are more of a process and a practice. Thus, students should reflect deeply on whether their criteria have a logical sequence (i.e., based on international trade theories) and/or their decisions contain competing objectives, and consider how to be agile when their proposed action plans are subjected to major contingencies (e.g., current conditions and potential events) related to Apple, WeChat, or in China. To keep this case study ongoing and help students develop critical reflective practice or deeper case-based experience, faculty could deploy a case study of WeChat and its growth strategy of entering a new market (e.g., South Africa, United States, Indonesia) either within the course or on a written exam.

ARTICLE: “Apple’s ecosystem lock-in has been made much weaker by WeChat” Compiled from TechCrunch, Forbes, The Wall Street Journal, China Channel, Caixin, Knowledge@Wharton, and AppleInsider by Long Le and Shawn Vecellio

(Click on the links and images in the case study to see the original source and its content)

January 2019: Apple’s Problems in China Grow

Once the number 1 player in China, Apple’s iPhone is now the number 5 smartphone brand by market share in 2018 — behind local rivals Xiaomi, Oppo, Vivo, and Huawei — and may not regain its dominance again. The iPhone’s sales in China has fallen in the last three years and plunged by 20% last quarter. Apple is being confronted by the above domestic rivals, who have flooded the market with both lower-priced and high-end smartphones, and whose product innovations are tailored for the Chinese market. Currently, China accounts for nearly a fifth of Apple’s revenues, but Apple’s strategy of convincing customers to pay more for its phones is becoming more difficult, especially when the peculiarity and specificity of Chinese smartphones are hitting a peak.

SMARTPHONE MARKET SHARE IN CHINA BY VENDOR

For Apple, the company is citing economic factors in China as contributing to the reduced revenue. Thus, in part, Apple has set new prices for its Iphones with reduction of no more than 6% to reflect the slowing down of economic activities among Chinese consumers, and has no plans to engage in price competition; the majority of Iphones are priced about $600 compared to the average of $250 among its Chinese competitors’ smartphones. Additionally, the U.S.-China trade war has exacerbated these problems, subjecting Apple’s products to potential tariffs from both sides. For example, import tariffs on electronics manufactured in China could affect its sales in the U.S., as well as retaliatory policies by China given the exposure of Apple’s manufacturing supply chains to China. Moreover, the trade war may already affect Chinese anti-American sentiments towards American products.

However, to focus only on stiff competition and slowing economy in China is to risk missing the other third of the story.

While there are numerous reasons why the iPhones aren’t as popular in China as they used to be, there’s one in particular that stands out: WeChat. Owned by Tencent Holdings Ltd., WeChat is a social app that most Chinese consumers can’t live without, touching everything from hailing taxis, mobile gaming, restaurant reservation, and making investment to e-payments – without having to leave the app. Thus, reports have shown that consumers spend more than 60% of their phone time within the WeChat’s operating system.

March 2019: WeChat’s Mini Programs Take 30% of Any In-app Purchases on Apple’s iOS

Today, WeChat has 200 million users who are active daily, which is quite impressive considering that China has a total of 800 million internet users. Additionally, users can choose to use over 1 million mini programs in WeChat APP, which in the course of 2 years has made its ecosystem half the size of the Apple App Store. Importantly, while they may not be widely known outside of China, WeChat’s “lightweight” apps run instantly on Apple’s iOS or Google’s Android mobile operating systems. Not surprisingly, companies like and Google and Starbucks have launched WeChat’s mini programs for their products.

So what are the implications when the Apple’s lock-in ecosystem goes unused in favor of WeChat? In fact, because of WeChat, 50% of iPhone owners stayed with Apple when buying a new phone, according to independent analyst Ben Thompson of Stratechery. The figure is 80% for the rest of the world. That has turned Apple into just another vendor in China, which Mr. Thompson wrote recently: “a hazardous place to be.” In China, some are starting to refer China’s operating system is WeChat, not Android or iOS. For instance, Ren Yanmei, 56, of Zhengzhou, recently switched from an iPhone to a Xiaomi phone, using it to read news, send texts and chat by video with her daughter. “If a phone has WeChat, I don’t care about the brand,” she says.

Increasingly, WeChat has made the Apple ecosystem lock-in much weaker in China, resulting in an erosion of the competitive advantage of Apple’s hardware. Also overlooked is that WeChat’s mini programs are cutting into a crucial source of income from Apple’s software, taking 30% of any in-app purchases on iOS. It is estimated that Apple Store users shelled out $46.6 billion in 2018 on in-app purchases, where Apple gets a cut. Presently, Apple does not get a cut from buy-in-purchased from WeChat’s mini programs because the two companies have not reached an agreement over billing function.

In response, Apple is trying to become a WeChat clone, according to expert observers. For example, Apple’s iMessage was once simply Apple’s texting app. Now it has a host of new features and its own App Store. The key changes are a nod to the fact that messaging has become a platform on which to build other services. Here, Apple creating an App Store for iMessage will greatly expand its potential for the same kind of in-app experiences. Payments and ecommerce is likely to be the key for iMessage.

Overall, WeChat stands in the path of Apple’s ongoing quest for smartphone domination in China. Even though iPhones support WeChat, it’s become one of its most popular third-party apps and has even begun to challenge the Apple App Store for supremacy. Apple still trades on status and dominates the higher-end smartphone market in China, but how worried should Apple be about WeChat challenging its competitive advantage? Interestingly, although it took five years, Apple earlier this year finally opened their first WeChat official account. Some analysts believe this move is evidence of a warming relationship and the latest line of changes Apple has made to their local strategy in China.